Russia: Restructuring of the Economy Appears to Be Successful During the Ongoing Crisis5 out of 5 based on 5 ratings. 5 user reviews.

Russia: Restructuring of the Economy Appears to Be Successful During the Ongoing Crisis

Donate

Photo: DPA

Originally appeared at DWN, translated by John T. Sumner exclusively for SouthFront

A Bloomberg analysis deals with the state of the Russian economy and comes to a surprisingly positive assessment. The country’s economy had indeed suffered from the price collapse in the oil business – the weakness of the ruble and the sanctions by the West had given an advantage to only some industries.

In an analysis Bloomberg concludes that despite the low oil prices the Russian economy has proofed to be unexpectedly robust in the past year. Hence, some industries could even book a significant growth – such as the information technology, whose production in 2015 increased by almost 30 percent.

One reason for the growth was the depreciation of the ruble, which had a positive impact on the export sector. Since the summer of 2014, the national currency had a substantial depreciation against Euro and Dollar in three sequential waves. Currently you have to pay 75 Rubles for a Euro – in mid-2014 it was still about 45 Rubles. Late last year, the Euro exchange rate rose to a peak of approximately 90 rubles.

“In the context of a doubling of the ruble exchange rate, which has led to competitive advantages, small indications for a change in the economic structure are beginning to manifest. But to change the entire economic structure, it will require more than just price advantages, “said one analyst, quoted by Bloomberg.

Among the biggest beneficiaries of the last year was the IT industry with a growth of 28 percent, the pharmaceutical industry, with a growth of nearly 9 percent, medical technology with almost 6 percent and the industry for precision instruments with about 5 percent growth rate ahead of the chemical industry and coal mining. It must be remembered that the overall economic performance fell by an estimated 3.7 percent in 2015.

Some sectors also benefited from the conflict between Russia and the West, which had been inflamed by the issue of Ukraine. The sanctions against Russia, demanded by the United States and applied by the EU, implied that the country had to rely in some areas on its own domestic production, because the respective goods could no longer be imported from Europe. This includes, for example, agriculture, whose sales rose by 4.4 percent.

The Russian economy still is heavily depending on the sale of oil and natural gas, representing approximately one third of government revenues, and about a quarter of national output is still related to the energy sector. For this reason, price-induced competitive advantages of some industries don´t have the potential to trigger any fundamental change. This would only work if sustainable investments would be made in the economy, observers say. “Some industries have benefited from the devaluation, but this is a one-time gain. Required in the first place are investments, economic reforms and the confidence of investors, ” a Russian economist said in an interview, conducted by Bloomberg.

In the meantime, chances for those requirements have become brighter again. In the World bank´s “Ease of Doing Business Index”, issued to evaluate the investment friendliness of countries, since 2013, Russia has been promoted by 61 ranks to the 51st overall position.

However, the article is not as positive as claimed. It sees the increases in those growth sectors as happening just once – using existing elasticity in the economy. However, for more structural changes you will need investments and there is little sign of those. Interest rates are much to high and the article points also to a need for reforms and more investor trust.

sepheronx

But that isn’t how economics work. Essentially most products that are sold are made from over the years as import substitution will take many more years before products become more mainstream in the market. So essentially with low ruble value in the forex market means that the cost of those goods have now decreased significantly. Since Russia has a positive trade balance, the export of these goods are potentially going to increase anyway.

As well, it has also increased investments within Russia too in various sectors not direct related to oil and gas with prospects of export. Such are: Car parts (Magna) and Car engines: Volkswagen, Ford, etc. Then of course there are the large investments in Agriculture which already also showing high increases – recent Vietnamese investment in dairy production and China/Thailands investment in dairy production in Moscow as well.

Import substitution will be the drive for domestic consumption based economy. The whole purpose of it is that instead of importing it for their own consumers use, which was important to Russia’s economy, instead will be giving the money to a local company who has locals as employees and who are also spenders as well, so that will only drive up the economic activity of the country.

As for energy market – Bloomberg needs to do some work. Energy market also is high tech market – products of energy storage and generating. Rosatom as an example has bookings worth $100B and that alone is a huge boost to Russias economy.

A lot of myths are generated through the whole Russian economy and its “diversification”. But what most of these analysts get wrong is that there are so many real world examples, anecdotal or not, that the benefits of current economic structure exists. I myself am an avid reader of sdelanounas website which covers the economic activity in Russia, and it really doesn’t go into full details of every little thing happening, but only the larger ones. And one cannot even deny after reading through of achievements gained.